Carpets Unlimited produces and sells three lines of carpet: economy, standard, and deluxe. Jeff Choi, the chief financial officer of the company, has prepared the following report on the profitability in the past year. In the report, fixed costs are allocated based on yards of carpet.
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Upon seeing the report, Matt Williams, the president of Carpets Unlimited, suggested that the company should consider dropping the economy grade and concentrate on the two other lines. Jeff replied, however, that that would lead to the cost allocation death spiral.
Required:
a. Revise the report assuming the company drops the economy grade.
b. If either the standard or the deluxe grades is reporting a loss in part a, revise the report assuming that ft is also dropped.
c. Explain what Jeff means by the cost allocation death spiral.